Worlds capital market
...ments on principal and interest due to investors". Put simply, credit ratings tell you, the investor, how likely you are to get your money back in accordance with the terms on which you invested it. While agencies stress that a credit rating is not a recommendation of any sort to purchase, sell, or hold onto a particular debt instrument, this is how investors use them. Says Moody's John A. Bohm in a 1995 article entitled "How International Ratings Strengthen Financial Markets: "For many investors, ratings are mainly a benchmark for setting "yes/no" or "buy/don't buy" limits on fixed-income purchases". He cites as an example a pension fund, which may require its portfolio managers to avoid un-rated or low-rated debt, or limit low-rated debt to a small portion of the fund's total portfolio. Ratings serve another purpose: helping institutions or countries to tap the international debt markets successfully and at favourable rates, something which is especially important for borrowers with whom investors may be unfamiliar. In fact, usually the issuer itself approaches a ratings agency to obtain a rating. Says Bohm: "For potential borrowers in emerging market countries, access to international capital markets is vital. Their ability to obtain funding is considerably enhanced if they are able to secure internationally recognised ratings for their debt instruments. He describes having a rating as tantamount to having a 'credit passport'. As mentioned above, not only does it make a debt or other issue a viable means of raising funds but also it can lower the cost of the borrowing. Says Bohm: "The credibility of a rating from a respected and globally established rating agency may thus allow issuers to enter capital markets more economically and more frequently, and to sell larger offerings at longer maturities." Of course, the ratings agencies also benefit from investors and issuers needs for a 'credit passport'. They make money from the issuer and from selling reports on the companies to investors. When rating a specific debt issue, i.e. assessing the ability of the issuing institution (issuer) to meet the terms and conditions of the issue, ratings agencies look at a range of factors including the particular features of the issue, the financial health, operating performance and quality of management of the issuer, and the environment in which the issuer operates. When rating an institution itself, agencies generally look at its intrinsic soundness by carrying out a more in-depth financial analysis. They also consider the likelihood it will require, and get, assistance from third parties in times of trouble. Following its analysis of an issue or issuer, an agency will assign a grade according to a ratings scale. Each agency employs its own scale, which, in the case of the international ratings agencies, can be considered comparable. An A to D scale is most commonly used. An 'A' (the highest category) denotes that the issuer's ability to repay principal and interest on a timely basis is very high or, put another way, that credit risk is very low. Ratings in the D category would indicate that there is a high risk of default. Agencies also rate countries or sovereigns. These help governments go to the debt markets and, like other credit ratings, indicate the likelihood that the sovereign will honour the terms and conditions of any issues it may do. Specialist bank ratings agency ...